Sunday, January 30, 2011

The market has been on a seemingly autopilot path for months on end; aside from a hiccup due to sovereign debt issues in Ireland, there has been no respite for bears since late August when Bernanke added "pushing asset prices up" as the third mandate of the Federal Reserve. Almost no economic news has mattered since investors believe the Bernanke Put is in play and whatever the data, the Fed stands behind the market. Indeed aside from 8 sessions in November we've seen extraordinary strength with the S&P 500 closing above the 13 day moving average throughout the rally. Even Friday's weaker than expected GDP and some disappointing earning reports by bellweather companies (following Thursday's spike in weekly unemployment claims) were completely ignored as the market started the day in the green. Only as the Egyptian worries unfolded on TV did speculators seem to think there might be a potential risk to their P&Ls. By the end of day we had a sharp reversal in U.S. markets, and indeed a close below not only the 13 day moving average, but the more commonly used 20 day. Bears finally have a bogey to trade against.

Small caps, which have led the market since late August are in a weaker position of late, with the recent bounce not even taking the Russell 2000 to recent highs - hence more vulnerable.

Aside from that technical change in course, we also are entering the 1 week each month that economic data is paid attention to by market participants. The fluid situation in Egypt and other potential Middle Eastern hotspots also stands above the market, as does another week of earning reports. To make things more interesting, so much of the rally from March 2009 has come in premarket - and indeed on Mondays; while the first day of the month (Tuesday) has been an almost constant winner for years on end. [Dec 1, 2010: More First Day of the Month Effects][Sep 30, 2010: Over 12 Year Period You Made More Money on First Day of the Month, than All Other Days Combined] So after months of snoozefests, market participants may actually need to stay awake and not let their head fall on the "buy" button as they doze off this week.

On the economic news front these are the market movers - please note if any report is bad you can be sure bulls will be blaming the snow.

The last 2 monthly employment reports have been head scratchers - the ADP and U.S. data have varied significantly, and weak data in government data in November led me to believe December would be a 'make up' period.... instead job creation was barely over 100,000. Meanwhile the unemployment rate dropped from 9.8% to 9.4% but mostly due to even more people dropping out of the workforce - another 0.2% of the entire U.S. workforce last month. It remains boggling where all these American workers have disappeared to - if we had a traditional workforce participation rate in the country the 'official' unemployment rate would be close to 12%.

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